September 8th Evening: The Recession Diaries
It seems that nationalisation is all the rage these days. The takeover of Fannie Mae and Freddie Mac, if it does not put paid to the notion that housing finance is too important to be left to the private sector, at least suggests that it needs that proverbial ‘heavy hand’ of the state. And thank god - were Fannie and Freddie allowed to go under it would be baby-crunching time in markets throughout the world. Of course, it was a reluctant take-over, just as reluctant as the take-over of Northern Rock, and the Bush Government did everything it could to downplay the announcement of this momentous step. But not even announcing it on a Sunday, on the same day as the kick-off of the American football season, can bury this news.In our little realm, the Government has taken a much different and almost unique step: it has blamed the fortunes of the housing market on the people. Apparently the whole mess is our collective fault. This strategy could be rolled out on a number of fronts: Minister Hanafin could march up and down dole queues, barracking the unemployed - ‘It’s your fault’. Minister Coughlan could write to every enterprise that closes down - ‘You’ve just been liquidated? It’s your fault’. Master Batt O’Keefe could storm into those over-crowded classrooms in debt-ridden schools that use abacuses instead of computers and point the all-accusing finger to children: ‘It’s your bloody fault’. Okay, a risky strategy - but you gotta admit: it has chutzpah.
The fact is no political party stood up the middle of the feeding-frenzy in the property market, and there is little bold vision coming out now. In one sense, it’s difficult to come up with a set of policies because once you start tinkering with one part of the market, something else pops up - so inextricably intertwined are property, housing, banking, finance, equities, employment and economic growth. You have to go back to first principles, and that means working your way back through a minefield. But let’s try.
First,in the short-term, though the Left is uncomfortable about letting the market do its thing, that’s exactly what has to happen now. Property prices should be allowed to fall. Any attempts to stimulate new-house build would be perverse given the level of unsold housing stock (until this stock is largely sold off there’s little hope of future sustainable new-build), and the level of construction activity must decline as a proportion of general economic activity - and that means fewer building workers.
This is not a counsel of despair. The state can cushion the decline in construction employment by (a) increasing social housing starts, (b) redirecting employment into eco-retrofitting, (c) front-loading capital investment, and (d) launching a coherent and sustained re-training programme. None of these options are without their problems:
- Social housing starts require financing and land, and these are not in ready supply
- The green-collarisation of sections of the construction sector requires a long-term guarantee of a market (as well as retraining and readily sourced materials)
- Capital investment has a limited labour content - a lot of spend for relatively little job-creation
- Retraining, which is everyone’s mantra, comes up against hard demographics - as SIPTU’s Marie Sherlock has pointed out
So just to cushion the fall in construction unemployment - to prevent it from turning it into a crash - is going to be quite a feat in and of itself. Is this Government up to even this task? Your call.
But before the property and new-build markets bottom out, we have to move quickly to put housing on a sustainable footing. And this calls for more fundamental reforms:
First, a house should be seen, and treated, as an item of consumption. We buy a house to live in. As such, it should not be subject to onerous taxation (which is why a ‘house property’ tax can be quite inequitable). However, when a house is used as a capital asset, to make money on, it should be taxed and taxed hard: levies on second-homes (except those that are rented and listed on the Tenancy Register) and on house market-values above €1 million; abolish the exemption of the sale of principal residences from the Capital Gains Tax, and abolish mortgage interest abd relief (but see below before you freak out).
Second, a major reform of the rental sector to turn it into a viable long or medium-term living option. Threshold has published a useful proposal of how to Europeanise the rental sector but their reliance on private investment may be a little wishful. To kick start this, the state should establish a public enterprise which would act as a ‘landlord’ of private rental units - either through new-build or buying out current rental properties. This would require a major programme of investment into what are in large part sub-standard properties inappropriate to family life.
This would be augmented by a new Housing Benefit: a universal payment for first-time house buyers, private and public tenants. This would replace the current tax reliefs and would be subject to taxation, to make it progressive. This would put subsidies to house-purchase and rent on an equal footing.
Third, a reorganisation of the construction sector itself, weeding out ‘the cowboys’ and dubious sub-contractors. A transparent and enforced register of building companies and contractors should be established to clean up the sector. The beneficiaries would be good building companies and contractors - those which pay the going rate, observe good labour relations, pay into the pension fund, etc. These companies we need to support to everyone’s benefit.
Now factor in the necessity for a new regulatory regime for lending institutions, control of the market in land, as well as a more rational approach to planning, sans developers’ interests, and one can see there is a lot of work to be done in a lot of areas before we can come to grips with the property market.
A tinkering here, an intervention there is not going to hack it. What is needed is a systematic reform of all the elements that make up the property market. But among the political parties, and unfortunately this includes the Left, there is neither the stomach or the imagination for such systematic reform.
So, instead we get Fine Gael’s foreigner-bashing, Fianna Fail’s pass-the-blame and as for the Left - well, if someone sees them wandering around the economic turf please let me know. I’d dearly love to know what they’re digging up.
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